Investors Vote Yes for Deal Between Sprint, T-Mobile

Shares of both Sprint and T-Mobile are up more than 30% since the day before The Journal reported Sprint was working on a bid.

Associated Press

Skeptics don’t think a merger of Sprint and T-Mobile could get past regulators. That doesn’t seem to be bothering investors any.

Shares in both companies are up more than 30% since the day before The Wall Street Journal reported Sprint was working on a possible bid for T-Mobile in the first part of 2014.

Analysts have given the deal mixed odds. In a research note earlier this month, Citi analyst Michael Rollins said there was a 35% chance Sprint would go forward with a bid. New Street Research’s Jonathan Chaplin, meanwhile, wrote that “the odds of approval are low” and, “We wouldn’t invest in either company on the basis of this deal.”

Others are less skeptical. Kevin Smithen of Macquarie wrote on Tuesday that complications such as a break-up fee and regulatory hurdles are all “addressable.” Wells Fargo’s Jennifer Fritzsche last week wrote that the possibility of a deal will in part “continue to drive [Sprint] shares higher.” Philip Cusick, an analyst at J.P. Morgan, wrote that despite regulatory skepticism “there could still be a chance.”

The key here, however, isn’t what Wall Street thinks. Masayoshi Son, the chief executive of Japanese technology company SoftBank, which owns about 80% of Sprint, is eager to build scale in the U.S. market, people familiar with the matter have said.

And it’s a deal the two companies have thought about for some time. Sprint and T-Mobile discussed a merger a few years ago, but ultimately backed down in part because funding the deal would have been too expensive for Sprint, and because the two carriers were operating different network technologies that would have been hard to combine. AT&T tried to buy T-Mobile instead, but the deal was blocked by regulators.

Discussions between Sprint and T-Mobile, which is 67% owned by Germany’s Deutsche Telekom, picked up again once Mr. Son entered the picture in 2012. Now, a deal could be more doable because Sprint is on more stable financial footing and the two carriers are both upgrading their networks to LTE technology, meaning they are on the path to being compatible with one another and therefore easier to combine.

Analysts say a combination of No. 3 Sprint and No. 4 T-Mobile would allow the companies to cut billions of dollars in costs and create a stronger competitor to industry giants AT&T and Verizon Wireless, each of which has more subscribers and annual revenue than Sprint and T-Mobile put together.

The question is whether they can sell regulators on the idea that creating a bigger competitor is a good idea. Investors seem to be betting there’s a good shot they can.